Table of Contents

On Bitcoin and investing

Disclaimer: I am not a financial adviser. While I do have some formal training in the subject, most of my experience is personal and all of the information below is personal opinion and not suitable to be acted on. I will not be held liable if you do anything that makes you lose money after reading my posts. Do your own diligence and do not rely on advice from anonymous online pundits. In the interest of full disclosure, the author is holding bitcoins.

Also, any investment can be dangerous. Do not use money you cannot lose in an instant, especially in cryptocurrencies which are notoriously volatile.
That being said, let's dig in.

Investment? Check again.

First, let's see what an investment is, or rather, is not, because I've seen a lot of confusion about this lately. For example a couple of posts on the bitcointalk forum about “investing in gambling” which is a good idea; however, the proposed business plan was no more nuanced than this. The poster really expected people to give him money that he could gamble in order to make a profit for them.
Need I say it? This is not investment!

You can, however invest in gambling as a business. There are websites online that provide gambling platforms for bitcoin or other altcoins, and they need investors (more below). You'll fund them with whatever you can spare; they use that BTC as bankroll for their operations and will give you a percentage of their profits. This is a sound principle - in gambling, the house will always win in the long run, and this is indeed a business plan. Other risk factors come into play here - how trustworthy are the operators, will they run away with the money? Will they claim bankruptcy later on and pocket the cash? Is their system well thought out, does it have flaws that could be exploited? And so on and so forth, but the principle is sound.

So many hands asking; so little BTC

For USD or any other currency, there are plenty of investment options that are regulated. For BTC, there are not that many, and those that exist suffer because of bitcoin’s main characteristic: it’s relative anonymity. It’s easy to just put up a website, spin a tale, hook some fools and run with the money – there is little recourse out there. Many, many scams have been pulled and the forums are still ripe with them, so there’s something to get you off the BTC bandwagon in itself.

Then there is another problem, brought on by another one of bitcoin’s advantages as a system - its availability to all kinds of people. Sure, it’s great when anyone can send and receive money from anyone and at any time, but what happens when anyone can setup a so-called business and go public with it, make an IPO and ask for money in return of shares? There will be a lot of people that will do exactly that, though they haven’t the slightest clue about running a business in the first place. When the hammer drops, and bad decisions and bad luck take them out of business, some of them fold and some of them run with the money. It is still early, almost like the wild west out there, and the investment scene is more akin to Craigslist than to the NY stock exchange. This doesn’t stop people from trying though…
Another thing that does not help investment opportunities arise is the market volatility. In any investment, you need to make some calculations and see if the return on your investment is worth the effort. I’m not even going to talk about risk here – one could write books about that topic itself – but just cold math. If everything goes perfectly, at the end of the chosen period, will I be richer – even if only by a few percent? If not, then no dice. And if so, what happens when the BTC/USD market goes down 15%? (It has before and will again). If you put in USD to start with, and got 10% on your BTC investment, you just lost 5% in fiat value. Not a good time to exit the investment…

I still want in

If you really want to get involved with crypto currencies though, remember that it's very much a gamble at this point, so do not invest all the fiat currency you have - pick a sum you'd be comfortable losing and go with that. Let me reiterate that: there is a real chance you'll lose everything. Bitcoin is new, it's not regulated (which is part of its appeal) and could go under in a day. Drops in value of 50% are not uncommon so be wary.

However, BTC has had one of, if not the, best return rates in history. $27 “invested” five years ago yields close to $3,250,000 1) now and I didn't put too many zeroes, that really is $ 3 million. The sheer size of that increase should already scream “speculation” to you if nothing else has - so, again, be warned. Bitcoin right now is not investment - it's very much speculation - but it's still a damn good option to put a couple of hundred dollars on it just on the off chance you'll make enough for a new car in a couple of years. There are also ways to make said BTC with little monetary investment up front, which we'll cover later.

Long story short, if you can spare a few bucks, Bitcoin is a good bet right now. You're actually better off just buying some BTC and holding it, in the hopes it'll go up in value, than investing into some scheme you saw online. Just putting money into the ecosystem is all the investment you need for starters - and it helps the community as well.
But say you have some bitcoins (or any other coins for that matter) and would like to invest them. They are just sitting there for now, and you'd like them to work for you because you remember reading somewhere that money should work for you, not the other way around. That's great! But take note of what I said in the last paragraph: it might be better for you to just hold them and wait for a rally to sell.

Caveat emptor

If you decided to invest in BTC-backed assets or businesses, remember that just because the technology is new, exciting and backed by cryptography, it does not throw a hundred thousand years of human experience out the window. People will be people - some good, some bad, most inclined to make a profit. Be wary of too good to be true schemes - they usually are. There is no such thing as a free lunch and that stems from immutable (for now anyway) laws of the universe. Energy is constant, it does not get created from nothing - and neither are bitcoins. There is considerable effort put into mining - from the very expensive equipment to the huge cost of electricity the whole network uses - and that effort means you probably won't be able to get 1% a day return on your investment.
What I'm getting at mostly is just that you should apply the same criteria to bitcoin investment as you would to any other kind of venture where you give some people money and expect it back after a while with interest. Be wary of fishy proposals - it is very easy for someone to just run with the money, as the nature of bitcoin is that transactions are irreversible, much like sending a wad of cash in the mail is. You wouldn’t send a hundred bucks in an envelope to someone you knew nothing about, would you?

So… no dice?

I actually didn’t say that all is lost. Just that most investment plans out there seem to be run by people with no experience in trading, or mutual funds management, or bitcoin mining. Some are outright scams, fooling even people who are doing their due diligence. Check this thread for example, where the founders of the CoinReturn Financial 2) pitch their trading based investment plan, offering shares for the general public to pitch in. They were wary of verifying their identities – which is par for the course with Bitcoin – though someone got a picture of a driver’s license from one of the founders. That was in March. Come July, the founders are gone, and the license is probably fake. 3). People got swindled, and the possibilities for legal remedies are slim to none because anonymity. One of Bitcoin’s best known features (and ironically, wrongly so as Bitcoin is not anonymous) comes to bite honest people who just wanted 20-30% return on investment **per month**.

Stories like these abound. People seem to forget that just because the technology is new, the system hasn’t changed that much and money is still money. People will lie, cheat and steal for a buck, they will lie, cheat and steal for a bitcoin. The whole gang is moving up online, ponzi schemes, high yield investment, the works – and it takes lots of restraint to not go pour those satoshi into the next best thing that promises 700% per year return. After all, it’s just play money, right? Well… it isn’t. And just as with the actual greenbacks, it’s up to you to prevent cheating and stealing. Trust your instincts – at least the ones that don’t tell you this 40% return on investment per month business might be a good idea - and remember – you can’t con an honest person.